1986 (5) TMI 70 - AT - Income Tax

Summary

Issues Involved:

1. Addition to closing stock of refrigerators.
2. Perquisite addition for the use of the car by the managing director.
3. Perquisite addition for telephone expenses for the managing director.
4. Disallowance of bonus paid to the staff.

Detailed Analysis:

1. Addition to Closing Stock of Refrigerators:

The primary issue revolved around whether the warranty cost should be included as part of the closing stock of refrigerators. The appellant argued that the warranty cost was a separate item and should not be included in the cost of refrigerators. The Commissioner (Appeals) held that the warranty cost was part and parcel of the refrigerator's cost since the sale price included the warranty and customers had no option to exclude it. The Tribunal examined the nature of the warranty, referencing Section 12 and Section 59 of the Sale of Goods Act, 1913, concluding that a warranty is a stipulation collateral to the main purpose of the contract and does not constitute goods or property. Therefore, the warranty cost could not be considered part of the closing stock. The Tribunal cited accounting standards from both the Institute of Chartered Accountants of India and the International Accounting Standards Committee, which define inventories as tangible property. Since the warranty is not tangible property, it cannot form part of the inventory. Consequently, the addition of Rs. 19,84,665 to the closing stock was deleted.

2. Perquisite Addition for Use of Car by Managing Director:

The Commissioner (Appeals) upheld the addition of Rs. 11,200 as a perquisite for the use of the car by the managing director, referencing a similar decision in the immediate preceding year. The Tribunal noted that there was no new information provided about the fate of the case at the Tribunal stage and thus upheld the disallowance. This ground was rejected.

3. Perquisite Addition for Telephone Expenses for Managing Director:

Similarly, the Commissioner (Appeals) upheld the addition of Rs. 1,717 as telephone expenses for the managing director's personal office/home as a perquisite. The Tribunal agreed with the Commissioner (Appeals) and rejected this ground as well.

4. Disallowance of Bonus Paid to the Staff:

The Commissioner (Appeals) upheld the disallowance of Rs. 16,774 out of the bonus paid to the staff, reasoning that the bonus should be computed according to the Payment of Bonus Act for employees drawing salaries between Rs. 750 and Rs. 1,600 per month. The assessee argued that paying a 20% bonus had been a consistent practice and was a term of employment. The Tribunal reviewed the employment letters and concluded that the bonus was indeed a part of the salary, hence allowable under Section 37(1) of the Act. Additionally, under Section 36(1)(ii), the bonus was deemed reasonable with reference to the pay and conditions of service, conforming to general practice in similar businesses. Therefore, the disallowance was deleted, and this ground was allowed.

Conclusion:

The appeal was allowed partly. The assessee succeeded on grounds related to the addition to the closing stock of refrigerators and the disallowance of bonus paid to the staff, while the grounds related to perquisite additions for the use of the car and telephone expenses for the managing director were rejected.